Ill-Aimed Shots at the IMF

December 12, 1997

The hero in the Asian financial crisis, the International Monetary Fund, is getting shot at from both right and left as it rides with huge bailout loans to the rescue of the region's nations in distress.

Two analysts from the conservative Heritage Foundation argue these countries should be left to their own means to deal with the capital flight that has hit their stock markets and devalued their currencies.

"The historical record shows that wasteful IMF bailouts have never worked," assert Bryan Johnson and John Sweeney. Indeed, the two would like the IMF to go out of business. They want Congress to withdraw from the multilateral body and get its contributions back.

"The IMF's dogmatic bias against growth and in favor of foreign creditors, free trade, and foreign investment no matter what the consequences, have wreaked economic havoc throughout the world," maintains Mark Weisbrot, an economist with the Economic Policy Institute, a left-of-center think tank in Washington. He too wants to close the IMF.

Contrariwise, we urge Congress when it reconvenes in 1998 to provide the IMF with the $3.5 billion pledge needed to launch a $47 billion borrowing arrangement with 25 member nations. Some panic still prevails in Asia. The extra money may be needed.

When it jumps into a crisis, we see the IMF on a mercy mission. That, of course, is not the way it is usually regarded by citizens of countries being rescued. IMF "conditionality" for its loans has sometimes prompted riots.

What IMF loans do is give a nation some extra time to wind down an international payments deficit with internal policy changes and reforms.

Individuals cannot rack up credit card debts indefinitely. Eventually they will have to tighten their financial belts.

Similarly, nations can't for long spend more abroad than they earn. (The US is something of an exception.) They can pile up foreign debts only as long as creditors allow it. When confidence disappears, as it has for troubled Asian nations, foreign and domestic investors flee the devaluing currencies.

The IMF's huge rescue packages ($57 billion in South Korea), are meant to restore confidence. Its loan conditions aim at dealing with the problems behind the payments deficits.

Critics are partially right in that IMF conditions haven't always been a perfect remedy. But IMF economists are learning from experience.

In Asia, the usual IMF demand for tight monetary and budget policies has been expanded to insistence on bank and other domestic financial reforms. This raises political hackles.

Nor is the system fully fair. The IMF can't tell Japan what to do because Japan has a huge trade surplus. It doesn't need rescue loans. Yet some of Japan's banks are in as grim shape as those in Thailand or in Korea.

Nonetheless, the sometimes rough justice of IMF reforms does prevent even worse situations from developing. Without the loans, nations in payments crises would do what they did in earlier times - put up big barriers to imports and control capital flows.

US businessmen, already seeing some slack in exports to Asia of farm goods and other products, would be hit even harder.